RISK ASSESSMENT

Zambian growth, severely weakened in 2015, is expected to remain weak in 2016

Industrial activity, especially mining, is greatly affected by electricity supply issues, which are likely to persist, due to a lack of investment but also because of drought conditions which strongly curtail energy production capacity (deriving almost totally from hydroelectric installations).
Meanwhile, copper production (about 10% of GDP) is expected to fall in 2016 following the decision made by several companies (in particular, First Quantum and Glencore) to cut capacity given the drop in prices, rising costs and energy supply failures. Activity at the Mopani mine (15% of Zambian copper production) was accordingly interrupted in September 2015, leading to the laying off of over 4,000 people. The services sector (telecommunications, trade, financial services), accounting for almost half of GDP, is expected to sustain economic activity.
Investors could be discouraged by the downward trend in prices for mining products, uncertainties over the fiscal framework (revision of mining code under way) and the political situation (elections in September 2016), as well as by the high level of interest rates (15.5% in December 2015). Some public investment projects could, furthermore, be postponed. However, household demand, supported to a degree by pre-electoral public spending, is likely to be curbed by the high price levels. Higher food prices resulting from the drought, increased import costs linked to the kwacha's depreciation against the dollar, as well as higher electricity tariffs (60% hike at end 2015 in rates for electricity supplied by the public operator, Zesco) look set to keep inflation well above the central bank's target (7%) in 2016.

Worsening imbalance in the public finances and deteriorating current account balance

The public deficit is likely to deepen in 2016. The stubborn weakness of copper prices (contributing about 12% to State revenues) and the cut in copper production are expected to limit tax receipts, greatly constrained overall by the slowdown in economic activity. No decision on rising mining taxes, initially due in January and then suspended after President Lungu came to power in February, is expected before the September 2016 elections. Wage rises and increased social spending, although modest, seem hard to avoid before the presidential election. The cut in electricity price subsidies is unlikely to be enough to prevent an increase in the deficit. Meanwhile, the burden of repaying the public debt (65% denominated in foreign currencies) will be increased by the kwacha's depreciation against the dollar and high interest rate levels. The public debt is likely to continue to climb, especially local debt, because of the high cost of external finance. The current account deficit is likely to widen in 2016 as a result of lower copper prices and export volumes (accounts for two third of exports), associated particularly with the economic downturn in China (second most important export market). Imports could slow, except those of energy, given the national energy production gap. Investment flows are likely to remain weak, against a very uncertain political and economic backdrop. After the collapse in the kwacha exchange rate in 2015 (-45% against the dollar between January and November 2015), downward pressure on the currency and a shortage of foreign exchange is expected to last into 2016, while the central bank's foreign currency reserves are weakening (less than 3 months of imports at the end of 2015).

Possible changeover resulting from the presidential elections at the end of 2016, but mediocre governance

Edgar Lungu, elected in January 2015 to see out the presidential term of Michael Sata, who died in October 2014, will be the Patriotic Front candidate (PF) in the upcoming September 2016 presidential elections. Dissension within his party, which has governed the country since 2011, and within the Movement for Multiparty Democracy (MMD), could give a chance to Hakainde Hichilema, of the United Party for National Development (UPND), who won almost 47% of the votes cast in the January 2015 poll. Serious economic difficulties could persuade Zambians to choose a political changeover, in a country which already saw a transition in line with democratic principles in 2011. Apart from political stability, performance on governance remains inadequate, notably regarding the fight against corruption and the quality of regulation.